Last week I attended the annual conference of the Aggie Real Estate Network (AREN) in Dallas. The speakers and panelists provided excellent insights into the current state of commercial real estate (CRE) in Texas. Below are some of my thoughts, which don’t necessarily reflect the speakers’ opinions or intentions.
Trey Morsbach of JLL provided an update on capital markets. Looking at the major asset classes, such as multi-housing, office, industrial and retail, it appears that pricing has generally stabilized and cap rate compression in the last quarter is evident in favored sectors (e.g., retail and multi-housing). However, cap rates are still higher in all four sectors than a year ago. A case was made for the advantages of moving early (ahead of consensus) on investment opportunities. For example, despite the uncertainty of the great financial crisis, investments made from 2009 to 2011 yielded some of the highest five-year returns in the last 20-plus years. There are obvious risks, but smart and calculated risk-taking often leads to outsized returns.
Lyndsey Cheek of Ryan Law moderated a panel of four CRE experts to discuss valuation and expense issues. The panel acknowledged lower property taxes due to last year’s rate compression. However, the panel lamented that increases in insurance expenses offset those reductions. Construction and maintenance expenses are also considerably higher than in 2019 and 2020.
The panel also expressed concerns regarding the recent Texas Supreme Court ruling in Texas Disposal Systems Landfill, Inc. v. Travis Central Appraisal District. The issue is the use of (and potential reliance on) market value evidence in “equal and uniform” value protests. While the decision was on a jurisdictional question (and remanded back to the trial court), the concern among taxpayers is the potential use of market value (including recent sale prices, which are protected by non-disclosure rules in Texas). The court clearly stated that “…if the fair market value of the property is higher—as both parties seem to presume—that value must yield to the lower equal and uniform value as assessed on comparable properties.” That is confirmation of the prevailing understanding among property tax experts. However, the court went on to say, “evidence of a subject property’s fair market value is relevant” in equal and uniform cases. That is a concern among taxpayer advocates.
Will this ruling allow Appraisal Review Boards and courts to compel sale disclosures of the subject property in equal and uniform (E&U) cases? Will the use of market value evidence significantly change taxpayer rights in equal and uniform cases? I’m not an attorney, but the court’s final statement on page 18 of the ruling seems to provide taxpayer protections on these matters. Nonetheless, much remains to be seen about how this will be interpreted in future decisions. Concerns persist that this ruling may lead to demands for basic financial records (e.g., rent rolls and income statements) in addition to closing statements in E&U cases.
There were four other educational sessions that day, including an economic update by Brett Fenn of Texas Capital Bank. The other three were panel discussions covering current matters regarding data centers, alternative investments, and development. The conference was very well organized and attended by over 150 professionals with a wide range of expertise in CRE. Next year’s conference will be held in College Station and will mark the 50th anniversary of the Society of Texas A&M Real Estate Professionals (STAMREP), dba AREN.
